Did you know you can get PPI payout TAX back?
You thought PPI was all over. It is now! Last Thursday’s reclaiming deadline saw websites crash and phone lines clog, as huge numbers of last minute Lillys and Larrys tried to get in before the guillotine fell. Yet our Money Saving Expert Martin Lewis, says for the millions who’ve already reclaimed the £36bn so far, and the 100,000s who’ve just put claims in, it’s worth knowing PPI pay outs are taxed, and most people whose claim is going through now or who have done it in the last four years can get this money – which can be £100s back.
The opportunity to reclaim mis-sold PPI ended last Thursday, and over the past decade or so, on the back of my heavy campaigning on reclaiming mis-sold PPI, hundreds of people have got in touch to say they’ve successfully claimed mis-sold PPI. While the average pay out is £3,000, the biggest ever personal reclaim I’ve heard was for £153,000.
But importantly, what many don’t know is that on their PPI pay out money, you would have paid tax on it, which most shouldn’t have, so you can reclaim it back. For full details see Martin’s ‘Full PPI reclaim tax back blog, but here’s briefly what you need to know…
Why is tax taken off PPI pay outs?
The money you get paid back for mis-sold PPI can have up to three main elements.
A refund of the PPI you paid.If the bank (outrageously) added an extra loan to your original loan just to pay for the PPI – you get back any interest you were charged on this extra loan.You get statutory interest (at 8% a year, but not compounded) on the total of both those sums, for each year since you got the PPI.
However, of these only the third element is taxed at the basic 20% rate - so £20 tax deducted for every £100 of statutory interest. That’s because this statutory interest is paid to try and return you to the position you would have been in, if you hadn't been mis-sold PPI.
Therefore – oversimplifying somewhat – it counts as savings interest as if you'd earned it on your saved cash. This applies even if the PPI pay out was used to pay off existing debts with the lender, or went towards claims firms' costs, as you are still benefiting in the same way.
So why are some owed this tax back? On 6 April 2016 the personal savings allowance (PSA) launched. It allows basic 20% rate taxpayers to earn up to £1,000 a year of savings interest tax-free, higher 40% rate taxpayers can earn £500 and top 45% rate taxpayers don’t get anything. The statutory interest from PPI pay outs counts within your personal savings allowance.
Yet unlike savings which are now paid without any tax taken off, PPI pay outs still automatically have 20% tax deducted before you received it. So if, like most people, you haven’t earned over your PSA in the year your PPI claim was repaid, then you can claim it back.
(It’s worth noting you can actually claim back tax as far as the 2015/16 year, the year before the PSA launched, but then it only really applies to people who were non taxpayers at the time.)
If you’re a taxpayer and the total interest earned from savings and PPI statutory interest is less than your personal savings allowance, you are due all PPI tax paid back. If the combined amount pushed you over the threshold, you should only pay tax on the amount above it. Take this example:
Betty Basicrate is a 20% taxpayer. In 2017, she…
A) Earned £200 interest on her savings.
B) Got a PPI payout, which included £850 of statutory interest.
So her total interest for the year was £1,050 – 50 quid over her personal savings allowance. Therefore, she should only pay 20% tax on the £50 over her personal savings allowance (so £10 tax) and the rest is tax-free. As the PPI automatically had £170 tax taken off it, she is due £160 tax back.
How much tax could people receive back?
It varies hugely depending on the size of your PPI pay out and when you took out the loan. But as a very rough example, if you received £1,000 PPI pay out, and took out the PPI 5 years ago, you could receive £60 tax back, or £100 back if you took it out 10 years ago. If you received a larger £15,000 PPI pay out and took out the loan 5 years ago you could get £900 tax back, or £1,470 for PPI taken out 10 years ago.
And Lorraine emailed “After having read Martins article on tax refunds for tax paid on PPI, I submitted R40 forms for myself and husband. I had tried to work out what we were owed but was gobsmacked. I received a cheque for over £600 and husband received cheque for over £2400! Thanks you so much.”
How do people reclaim this?
To reclaim the tax you’ll need to fill in the online (or you can post it if you need)R40 form (or form R43 if living overseas). It’s a bit tricky but if you read my blog linked above, it should help walk you through it.
If you're really, really struggling to fill the form in, you could just include a covering letter to HMRC, including your address and national insurance number saying something like:
"I was a basic-rate taxpayer in the 2016/17 tax year, and had £xx tax automatically taken off me at source for a PPI reclaim pay out. That should have been part of my tax-free personal savings allowance, please can I reclaim it? I have tried to fill in the form as best I can."
Or call HMRC on 0300 200 3300 to discuss. I can't promise writing the letter will help, but it's better than doing nothing. Higher or additional-rate taxpayers will need to declare the extra income (just the statutory interest, not the other parts of the refund) to HMRC to ensure they pay the correct tax.